As we continue to examine the rent-to-rent business versus rent-to-sell, I want to point out a number of reasons why I believe very strongly that dealers need to engage in rent-to-rent. If your dealership is already in the rent-to-rent business, I encourage you to continue to develop that. And if your dealership is not in rent-to-rent, then I encourage you to get started. One of the main reasons is that customers are demanding it these days. The customer requirements, the customer preference, it has changed greatly over the last 25 to 30 years. So back in the 70s and early 80s, rental was not necessarily a main way of sourcing equipment by contractors. But over the last 30 years, it has become very mainstream. And so customers are continuing to have less and less desire to owning equipment. They'd much rather outsource that activity to a dealer or a major rental company. So customer demands are changing. There's new customers to be had. And I don't know too many dealerships that couldn't stand to have a few more customers. The dealer business model is under a lot of pressure. Historically, the dealer business model had parts, sales, and service. Well, that's a wonderful thing. You make really nice margins in parts. You make nice margins in service. As we've already discussed, the margins on new equipment continues to get squeezed. So the traditional business model works quite well as long as you have a lot of your brand of equipment out in the local area that breaks down a lot because then you get to sell parts and service to it. But let's just say that you've got a brand of equipment that is relatively new to the area and there's not a lot of machine population around your dealership. Well, the two things that you can make the most money at in terms of margin, parts and service, you're not going to get very much of that. And so it's really difficult to try to have a profitable dealership when all you're being able to rely on is the sales side of the house. So adding rent to rent gets you going with more customers and it's got a higher gross margin than sales by almost three times. So dealers need greater margins to help them run their business and rent to rent is one of the ways to get there. So we already mentioned the higher gross profit margin. In one of our previous slides, we talked about creating positive cash flow. And the reality is if you've got a robust rental fleet, and let's just say somebody comes along and decides they need to buy something, even if you didn't have that thing sitting in the yard, you have the ability to either discount a rental rate to them or potentially give them a loaner out of your rental rate until such time as a new machine can show up. So rather than having machines sitting there by the fence that is accruing interest charges, you can potentially have a fleet of machines that are sitting there earning money and it will act as a gap filler, if you will, when you don't have the brand new machine available and you have to order it. Additional reasons why dealers need rent to rent is, as we said, the new machine sales margins are trending down and as we continue to have global pressure, more competition in the local marketplace, I don't expect that sales margins are going to increase. We talked about the sustainable source of used equipment, positioning with emerging contractors. So what that means is getting started with a contractor literally about the time that he starts his business. Most likely he will be inclined to rent equipment to begin with, and by creating that relationship and having equipment available for him to rent, enables you to start right from the beginning in a relationship of being a good source of construction equipment as well as demonstrating your capacity for parts and service. It's a great way for new product introductions. We mentioned that earlier. It's a leveraged approach to reach small customers. So in the sales business, it continues to be more and more expensive to put a salesman on the road with a truck, cell phone, tablet, potentially a trailer showing and towing equipment, and there's only so many stops that they can make in the course of a day. There's only so many customers they can possibly touch to introduce your brand. And so employee costs and the costs of putting a salesman on the street continue to creep up and the sales margins on equipment is going down. So what that means is that every year it becomes a little bit more expensive to sustain a salesman, and that means we've got to sell a few more machines to be able to just basically break even with the salesman. So by having a robust rental fleet, now we've got customers that are coming towards us because we've got available inventory for rent, and so now we get to leverage the relationships from internally to these customers rather than just having to rely on the relationships of the outside salesman. So especially for low-ticket items like skid steers and mini excavators and even backhoes, I believe that having a strong rent-to-rent fleet is a great way to leverage that size product across a lot of customers and maintain relationships. So that gives you the final point there, the low-cost sales coverage on compact machines. That's what I'm describing. Then going forward, okay, we've got economic reasons why people might want to rent in the future and continue to expand that, but we've also, as you know, we've had some things going on with the federal government and Clean Air Act, and so manufacturers have had to change the design of their engines and they become a little bit more complicated and certainly become a lot more expensive. And so as equipment that does the same exact job as the last one, but now all of a sudden the cost of this unit might be 15% to 20% higher, I think that's going to drive a few more customers away from owning towards renting. And then we always have the conservation of capital. People want to hang on to their cash so they're not likely to want to put a large down payment on something and take the risk over another five or seven years. Utilized equipment is another reason why people tend to want to rent equipment because it's something that they don't need all the time. So they will generally buy the piece of equipment that is their mainstay, the thing that seems to fit the bill for most of the work that they do. And then occasionally, let's just say they need a big hydraulic breaker or maybe they need a concrete crusher. Maybe they need specialty attachments. Maybe they need a 60-foot lift. Whatever that might be, that's one of the reasons why rental continues to expand is for equipment specialization. And then clearly, when someone is thinking about buying a piece of equipment, they are really making a statement about the future. They believe that A, they're going to have a continuous stream of work over the next three, five, six, seven years. They also are making the gamble that the piece of equipment that they're buying will be suitable for doing that kind of work. And then they are also making the gamble that the future values of this type of equipment are going to hold strong. And so that's quite a gamble if you think about it. And so a lot of contractors these days are thinking about, how do I push that financial risk towards someone else? And so if someone will do that for me, then I don't have to take on that risk. So contractors are clearly in the mood for renting, and they're going to either do it through an equipment dealership or maybe a major rental company. And then lastly, the fuel, which has to do, in some cases, back with the emission control, is engines are being designed to use low sulfur diesel, and maybe they don't want to mess with that. Maybe they think that's difficult to come by. But regulation, federal regulation, whether it be for clean air or it could be for safety, and then we've got new technology coming out, and then we've got financial risk, all of these are drivers as to why someone might choose to rent in the future. And all of those are in our favor as a dealership if we are prepared to rent. So lastly, I want you to understand that I believe dealers need to be in rental, both in the rent to sell, because that serves a purpose in being able to, as I said earlier, engineer a sales price that drives the sale of a machine and gets you more machine population out there so that you can get parts and service business. At the same time, you need to be in the rent to rent business for all the reasons that we just finished discussing. So this is not an either or proposition. I think I want to be in rent to sell or rent to rent. What you really need to embrace is the idea that you need to be in both types of rental, and they serve different purposes. Another key reason to be involved in rent to rent, as we review the AED cost of doing business survey results, the high profit dealers across the country are the ones that are more committed to rent to rent than other dealers, both in the size of the rental fleet as well as the revenue mix. The revenues that they get out of rental is higher than the average dealer. High profit dealers have already come to figure out that rent to rent is one of the key elements to driving their business. As we said before, dealer profitability tied to revenue mix. So if you have a $10 million business or a $100 million business, and all you're getting is sales activity at about 11 or 12 percent, you're not going to be as profitable as the dealer that, let's just say they had a mix or a blend of revenue, the same amount, but in sales they're making 11 or 12 percent, in the parts business maybe they're making about 30, and in the service department they're making about 50 to 55, and in the rent to rent business they're making about 35. The profitability generated by each of those four revenue streams is much different. So revenue mix is really key to your profitability. Inventory levels are foundational to the revenues, meaning that you can only rent it if you've got it available. So therefore you've got to make the financial commitment to it. And then getting into new markets, whether this is industrial, whether this is ag, general construction, whatever that might be, rental is the easiest way to enter a marketplace because it knocks down the barriers related to your product or your pricing, your brand, you as an unknown dealer, rental enables you to begin a relationship with a new group of customers.

rent-to-rent business

customer demand

dealer business model

gross margins

used equipment